I despair for the future of our society which we know is going to financially suffer in the next four years as the government tries to eliminate the budget deficit – simplistically, the difference between what the government takes in tax and what it pays out for the public sector and welfare. We know that gross wages will remain under pressure with low inflation, high unemployment and anaemic economic growth, at least for the next two years. We also know that there are cuts and additional taxes, €3.6bn in 2012 alone which will need be detailed in Budget 2011 in December this year. What is despairing is that there doesn’t appear to be any centralised effort in bringing down the existing cost of living so we face the prospect of having lower take-home pay in the years to come but the same or higher living costs.

This is confirmed in the Eurostat report issued today which examines price levels across the EU and in selected other countries. It shows price levels by reference to the EU average which it sets at 100. The table below shows the results,Ireland’s average prices –highlighted in red – are shown as 118 which means that on average, our prices are 18% above the EU norm. And if you look at what I suggest are comparative countries which exclude high-tax/large-public sector Nordic countries, very high income countries and recent Central Eastern European joiners, we are still at the top of the league. Our prices are 13% (118/104) aboveGermany and 18% higher than in theUK for example.

Of course price levels by themselves don’t illustrate standard of living. You need to compare price levels with income which in Irelandhas been at elevated levels in the 2000s in particular. Last week Eurostat released GDP figures for the EU and we are still in the top three countries for per capita GDP in Europe. Subsequent to that release, the veteran journalist Vincent Browne wrote to Eurostat and asked for the GNP figures, which are arguably more relevant to Ireland as so much of our GDP relates to the activity of foreign companies, which when you extract out profits that these companies repatriate, gives a more representative view of the amount of money in the economy. The figures provided to Vincent as reported in the Sunday Business Post showed Ireland’s GNP to be 102.7 being just 2.7% above the EU average, but the Netherlands was 134, Germany at 120, the UK at 115.5 and France at 108.7. Our GNP income has declined dramatically in recent years – as recently as 2007, our GNP was apparently at 127.

So what appears to be happening in Irelandis our income has contracted substantially but prices have remained high. And yet in Irelandwe have a plethora of competition agencies which to my mind are there to ensure products and services are delivered at competitive prices. There is, what I have found to be, the practically-useless National Consumer Agency (who have another two days to start rolling out a mortgage comparison product on the itsyourmoney.ie website; at least that what the EU Competition Commission mandated in February this year). Then we have the National Competitive Council who produced a report last week which included a focus on property cost but ignored the huge price differences between here and Northern Ireland. And then we have the Competition Authority, which was in the headlines recently for its dawn-raid on the Irish Farmers Association’s premises in an investigation into the milk industry. We even have a private-sector Consumers Association. And yet for all of that, prices inIreland are some 18% above the EU average while income is just 2.7% above the EU average.

Now might be a good time for a top-down review of competition. After all, if wages are going to be further hit in the next few years, we might actually have an opportunity to soften or eliminate the effects, if we can get our prices down. Many costs in the State will be a function of wages, so unless wages come down, prices can’t come down. That is why we need a strong competition czar because the circle has to be broken so that prices and wages can come down together. There is also an issue with legacy debt, but that’s an issue for another day.

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And then we have the Competition Authority, which was in the headlines recently for its dawn-raid on the Irish Farmers Association’s premises in an investigation into the milk industry.

This simple example represents the entire purpose of competition agencies in Ireland: To protect the profits of industry above the interests of the consumers and suppliers.

That is why we need a strong competition czar because the circle has to be broken so that prices and wages can come down together.

There’s no point giving officals powers if they aren’t going to use them or worse, are only going to use them on the wrong targets as per the Competition Authority and the IFA.

In the retail sector there are two(really one) principal players which must be tackled before any real retail price reductions can be achieved; these are Tesco and above all Dunnes Stores. Bring the prices of these retailers down to UK levels and your prices problems nationwide will end rather quickly I feel.

Unfortunately the odds of any Irish Government taking on Dunnes Stores in any serious way are only slightly less remote than the odds of them selling Country Dublin back to the British. This retailer is even allowed to handle its VAT in its own particular way, and if they’ve been given that much latitude I can hardly see the government putting pressure on them to lower their prices. Ergo, I cannot see foresee any serious government initiative to reduce prices in this country in the future.

Notwithstanding that however, we can of course expect a steady stream of government rhetoric and and other theatrics surrounding this issue–just nothing of substance.

“Many costs in the State will be a function of wages, so unless wages come down, prices can’t come down. ”

I’m shocked at this simplistic analyse. Your analysis is normally well reasoned.
It’s sad to see an excellent blogger buying into this propaganda.

The concept that lowered wages will lead to lower prices is simply not backed by the facts. Prices are a function of what the market is foolish enough to bear.

Lets start with the so called professions. Trainee solicitors are paid about €30,000 a year they are charged out to the likes of NAMA at €160 per hour. Do the math. €160ph * 50hrs per week *48 weeks= €384,000 per year. Say €84,000 to cover wages, overhead and all costs. That’s €300,000 profit for our poor legal friends. Plenty of room to lower prices without lowering wages.

Tesco call Ireland Treasure Island because they make 9.3% profit here. Their most profitable sector worldwide. The groceries sector is dominated by 3 players, Tesco, Musgraves (who operate Supervalue and Centra), Dunnes. They operate a sham competition of special offers and putting up prices to reduce them later.

“1996-2005 Ireland’s rate of food inflation was virtually three times higher than that of the UK, where the rate is 8.3%. …… prices rose between the period of 2000-2004 the prices of clothing footwear and household goods fell, which would mean retailers could not explain higher prices because of higher costs as these would appear in other industries’ costs also.

I cannot find anyone in the groceries sector who can explain how grocery prices rose by 9% while clothing prices dropped by 15%. Same labour costs.

Possibly the grocery oligarchy just steadily increased its profits.

Finally prices are function of how well the business in run. As Toyota has consistently shown you can pay the same wages and benefits as the competition but still be extremely competitive and profitable.

The main perpetrators behind this lower wages = lower prices myth is the fast food sector. If you’d like to explain how a breast of chicken and chips at €5.45 requires lower wages I’d love to hear the costings.

Time to stop perpetrating the myth that lower wages are the answer to this free market generated disaster.

“Many costs in the State will be a function of wages, so unless wages come down, prices can’t come down. That is why we need a strong competition czar because the circle has to be broken so that prices and wages can come down together”

The circle is that prices that we get charged every day are a function of costs including wages which in turn are a function of prices. So the bar-man gets paid €8.65 per hour because McDonalds charge him €2 for a coffee because the server in McDonalds also gets paid €8.65 per hour. If the coffee were to cost €1.50 then the wage levels might come down 25% also, But if you cut wage levels and the coffee stays at €2, then you will increase hardship where there is already hardship. And for coffee, read every other day-to-day living cost and legacy debt. That’s why we need a competition czar and leadership in general to start bringing wages and prices down together. Otherwise in four years time, our costs are likely to be still well above the EU average and our salaries (particularly take home pay) perhaps even lower than the EU average (we’re presently at 102.7%). Kirsten is right to say GNP includes all sorts of transfers but hopefully those might be consistent throughout the EU which would still make the GNP ranking valid.

You show an example from the law profession to illustrate why wages are such a small part of prices charged, that wages can’t be at the root of pricing. That may well be true in some of the hallowed professions, law, medicine, accounting/finance and a few others. Though I would hate to be the poor sod trainee solicitor that worked for you for 48wks x 50 hrs/week. From experience, you would price on the basis of 200 days (365 less 104 wkends less 9 days public holiday less 25 days holiday less 10 days training less 5 days sick less 10 days other) by perhaps 5 hrs a days (travel, admin and downtime when a client can’t be charged take out the other two) and might it be closer to €130 per hour charge-out rate when you strip out VAT? So perhaps €130,000 per annum for someone that might cost you 2/3rds of that. Add in general overheads like professional indemnity insurance, accounts, marketing, HR, IT and you’ll probably still be profitable but it won’t be in the human-trafficking stratosphere that you suggest. However, it is also true that some of our professional fees are amongst the highest in the world, I seem to recall a recent survey that showed our lawyers are the second most expensive in Europe after Moscow.

The so-called professions are being tackled. Not that Labour and FG have discovered Enlightenment. It’s largely because the IMF and EU are standing behind them with a stick and a Memorandum of Understanding. Expect lots of lobbying and jostling by representative groups, or vested interests.

But here’s the truth. We might save €25m a year if we get 500 of the top paid public sector workers to take €50k cuts. But you know yourself that €25m is a drop in the ocean. We’ll incur that in interest on the bailout in the next 7 days.

And it’s true that tackling costs and anti-competitive behaviour in the professions will also lead to savings and make the economy more competitive.

But what you’re not being told is that the Garda, the nurse and the teacher will come under pressure to deliver a financial contribution to reducing the deficit. And I expect the minimum wage will come under pressure again. The IMF approach in particular is to go after the top first, largely for the good of society which might then better accept cuts at the lower levels. If you want a laugh on how the Greek law profession is reacting to the IMF, then read here

And coming back to the comment above – “many costs in the State are a function of wage costs”. That is particularly true in competitive service industries like many of the tourist-related businesses. And I would stand by the comment.

Kirsten might come close to expressing sentiments in a near Marie-Antoinnette fashion but truth be told, these wages will eventually need to come down OR we have more taxes / lower standard of services. Or as OMF says, emigrate.

@namawinelake. I’d suggest you talk to some trainee solicitors before you start quoting theoretical hours/days. 50 hours per week is conservative more like 60 is the norm. As for sick days forget about them.

I notice your ignore Tesco’s 9.6% profit margin. You ignore Toyota’s ability to compete paying the same wages as their competitors. No explanation of fast food margins.

It’s a classic lazy Irish solution to lower wages. Any idiot can reduce costs by reducing wages it takes work and talent to become more efficient, to train and motivate employees and to win more customers.

Lets take a simple process in the hotel industry. Every queued for checkout in the morning, slow and labour intensive. How about charging and issuing the receipt on checkin. No need for staff at checkout, no delay…Buy anything else, meals, booze pay with same credit card you use to pay the hotel bill. How about emailing a pdf receipt rather than printing…

Nay too much hassle lets just lower wages.

We are probably the most pro business country in Europe. WSJ in 2010 rated Ireland the 6th best place worldwide to start a business. In most continental countries you can’t do anything without a permit. We have the lowest tax rate. But all the business community can talk about is lowering wages.

Kicking the folks at the bottom is a lazy Irish answer we can do better than that.

@Paddy, your comment was delayed in moderation because you entered a different commenter name “pddy19″

As regards Tesco which is probably one of the most transparent grocers, its Irish profit margins are indeed very high by comparison to its international operations. Tesco however is a very efficient company, probably more so than local grocers.

Commonsense will tell you that your costs taken together will generally provide the basis for your sales prices in an efficient economy. And those costs include wages, property and rent, utilities and local authority charges and the cost of product.

If we are to re-base our economy, and I think we need to, all of these costs will need to be examined. Furthermore, I don’t think we’ll have a choice – in four years time I don’t think costs in Ireland can still be 18% higher than EU average . The analysis above with which you have trouble, promotes the concept of maintaining standards of living (which is different to wages, because the standard of living considers wages AND living costs) and if you want to maintain standards of living, and reduce wages then you need make sure daytoday costs and legacy debt come down at the same rate.

Sadly you sound like another apologist for the IEBEC/ISME/SFA drumbeat which is real pity since your NAMA analysis is excellent.

Your explanation of Tesco’s excessive profits due to efficiency is pitiful.
The more reasoned explanation is that Tesco can charge higher prices than the UK. You refuse to recognise is that the Irish grocery oligarchy keeps pushing up prices and thus profits.

“Tesco which is probably one of the most transparent grocers”. Care to explain this statement? The only reason we know Tesco’s profit margin in Ireland is because it was leaked.

“And those costs include wages, property and rent, utilities and local authority charges and the cost of product.”

There are two problems with this view. Why did you leave out Profit in the price equation. If profits are excessive then prices are high. Why can’t Tesco take the same margin as it gets in the UK and lower prices? Secondly this only works in an efficient economy like the UK. Ireland is not an efficient economy particularly in groceries.

Prices are driven by what the market will bear rather than costs. If Tesco could buy an orange for 30 cents and sell it for 3 euro would it not do it? If you can’t make a profit at market prices you get more efficient or you out of business.

“The so-called professions are being tackled”. Care to provide any evidence to back up this statement. My dentist, doctor, solicitor, estate agent and consultant seem to live a parallel universe where the celtic tiger is still roaring.

“re-base our economy” and reform. As Vincent Browne pointed out these sort of weasel words are nice sounding codes for cutting the wages of the weakest in our so called society.

As I said any idiot can lower prices by lowering wages. What are we paying fancy management salaries and fancy benefits for?

Lay off the weakest and lowest paid, breakup the oligarchies, lower profit margins, train and motive employees, provide excellent customer service and we can make real progress.

Let’s do a bit or work for a change and stop taking lazy Irish solutions to free market disasters.

To be clear the initial post was about the price of goods and services in Ireland compared to the rest of the EU. We’re apparently 18% above the EU average. And the entry was also about adjusting wages so that prices could come down but, and this is the important point, ensuring there was a competition czar or the like making sure that prices did come down so that standards of living were maintained.

Briefly on your points, as far as I can tell Tesco in Ireland is comparable in pricing to Dunnes and Superquinn. Although I haven’t studied each’s financial statements, it was noteworthy to read the Tribune’s reporting which I don’t think was rejected by Tesco that Tesco’s Irish operation has the highest margins in the group of 7% – https://www.tribune.ie/article/2004/apr/25/irish-profit-margins-are-tescos-highest/. I don’t recall Dunnes and Superquinn as being particularly profitable on their grocery operation but I might be wrong – Superquinn appeared to have a 5% margin in the early 2000s which might be out of date now http://www.independent.ie/business/keeping-it-all-in-the-family-509768.html. But on the face of it, if you have two competitors in a market and one is generating a higher margin than the other then I think it’s fair to say Tesco is more efficient. That doesn’t mean that prices aren’t too high, it just means that in a market where both companies can set prices, Tesco is generating better margins.

What I wrote was “Commonsense will tell you that your costs taken together will generally provide the basis for your sales prices in an efficient economy. And those costs include wages, property and rent, utilities and local authority charges and the cost of product. ” So you’re right we need an efficient economy where there is competition, but once you’ve established that that is the case, then if your prices are out of line with other markets, then there should be a tendency to examine all the costs.

@Paddy/Kirsten, (Paddy I’ll respond to you more fully tomorrow), the problem with the minimum wage right now is that many, many people are already on or under the breadline so cutting the minimum wage without addressing costs, you’ll finish people off. The EU cost survey shows we’re out of line with costs 18% on average above the EUand Vincent Browne’s figures seem to confirm that our incomes have collapsed from 120%+ of average to 103% of average. So before touching wages, costs – both daytoday and legacy debt – need to be addressed. If we deal with legacy debt and daytoday living costs then maybe we’ll be able to look each other in the face when we seek to cut those on lower wages. And the brutal truth is that wages will need to come down, or taxes go up, or living standards go down.

Substantially, the wages are the costs for the services sector. The costs cannot reduce without the wages reducing first.

GNP, however, is not a synonym for income as you seem to suggest; it also comprises rent & profits & interest. I don’t know the breakdown for Ireland but it may be in the NIE.

Who is on the breadline? We have a national obesity epidemic. The poorest are nowhere near the cakeline.

Cutting wages will allow employers to hire more people. See the NCC reports for evidence that wages account for 70%+ of Irish service costs. Hiring more people alleviates the social and economic symptoms of mass unemployment.

To avoid the ‘poverty trap’, unemployment payments also need to be reduced at least in the direction of the amounts paid by our lenders to their own citizens.

And we cannot reduce welfare because Labour has promised not to do so.

Debt costs are not just a legacy issue. GGD generated debt will increase by approx 15.5bn this year and 80% of that money is going into public wages and welfare payments.

We had a society where unskilled labourers got used to earning 1,000 a week and where line managers of third rate regional technical colleges could expect 6 figures. It’s quite a distance to row back from there to the shores of reality.

@paddy19 I think I can help you with the unsolved enigma of why food prices would rise while clothing and footwear prices fall. Consider the wages of the Chinese people who manufacture the clothing and footwear sold in grocery stores. Now consider the wages of the Irish people who grow and manufacture Irish food products. There is your answer: pay. (China entered the WTO in 2001)

In recent years, Irish people have drawn incomes higher than the value they added through their labour. They do this by receiving transfer payments from the state that are the proceeds of a property Ponzi scheme. But the scheme is now dead and the reduced transfers are being funded from emergency borrowing. And the borrowing cannot continue indefinitely. So one day Irish people will have to earn fair wages.

I would agree with your comments re Dunnes/Tesco needing to be tackled because of their market dominance.There is a very strong case to make that no reatailer should have more than 10% of the market. The same is true of the newspaper market.

@Kirsten. the enigma still remains unsolved. The report compared the relative changes in prices in sectors between Ireland and the UK. The enigma is that one sector in Ireland increased relative to the UK while another sector tracked the UK with a 15.9% reduction.

It is interesting that clothing, a highly competitive diversified sector tracked the UK while groceries a sector dominated by an oligarchy increased.

All the usual explanations: wages, rates, regulation charges apply to both sectors.

The questions remains how did clothing track the UK while groceries did not.

I genuinely cannot find any other explanation other than increased profits.

@paddy19 OK I read the paper you posted. There is no reference that I can see to the movement -absolute or relative- of UK clothing prices. It refers to the growth of food prices in the UK relative to Irish food price growth.

Let’s assume that it is true that the relative prices between the UK and Ireland for clothing and food diverged over a decade. The relative impact of local wages on food prices is higher than the impact on clothes prices. Food is generally locally grown packaged and produced. Real wage growth in Ireland greatly exceeded the UK in 1995-2005. So relative costs were higher.

During the boom income tax was cut to nothing or near nothing for most workers. So the combined wage rise and income tax cuts led to huge increases in disposable income. Irish consumers found themselves with giant take-home pay and easy credit and a feeling that their houses were goldmines and reacted by losing interest in the price of vegetables.

All companies seek to maximise profits and to behave oligopolistically where they can get away with it. I don’t think it’s clear that the UK grocery market is less oligopolistic than the Irish market.

r@Kirsten: See page 135 quote attached for the UK/Ireland as follows:
“An important statistic is the fact that over the period 1996-2005 Ireland’s rate of food inflation was virtually three times higher than that of the UK, where the rate is 8.3%. Also the Competition Authority, in its submission to the Department of Enterprise, Trade and Employment highlighted that although food prices rose between the period of 2000-2004 the prices of clothing footwear and household goods fell, which would mean retailers could not explain higher prices because of higher costs as these would appear in other industries’ costs also.
Food & non-alcoholic drink +9.6%
Clothing & footwear -15.9%
Housing durables -3.9%

Source: Department of Enterprise, Trade & Employment 2005:118″

” I don’t think it’s clear that the UK grocery market is less oligopolistic than the Irish market.”

How do you explain that Tesco can be twice as profitable in Ireland in comparison to the UK. The obvious answer is that the Irish grocery trade is less competitive and is largely controlled by a small group of companies. This is the very definition of oligopoly.

Clothing and Consumer Electronics are below average. I’d have thought that these have similar costs (rent, wages, insurance, energy, rates etc) as food providers. So why are foods (relative to Clothing and electonics) so much higher?

Competing with Europeans is my stock and trade, I do it every day of the week. I find this report very interesting, especially as it aligns exactly with where I see the greatest competition coming from. The goods I sell are homogeneous and my greatest competition comes from Poland, Hungary and the Czech Republic (coincidentially some of the cheapest in this survey). What is interesting here is that I am very familiar with the numbers and there is more than meets the eye.

Input costs are of course important, but profit expectation, especially as a % of capital cost is also important. My experience is that in a distribution business Eastern Europeans are happy with 10% gross margins where as in Ireland we would typically look for 20%+ gross. Add to that the extra transport costs of getting stuff here, and the price difference is 30%+.

I have two contradictory conclusions.

1) If something unforeseen happens, Eastern competition working off 10% margins will fold.

2) If Irish companies are to compete with Polish ones for EU business our costs need 20% below theirs, the reverse is currently true.

Our current trajectory suggests the plan for Ireland Inc. at best is to wait for other peoples costs to rise by 40% in order for us to regain our competitiveness. This may be a forlorn hope as countries like Germany have very successfully controlled and reduced their costs over the last 10 years.

Looking further into the numbers of surveys like this, ironically produced by the EU, makes me consider the only practical and speedy way for us to regain competitiveness is to reintroduce the Irish Pound for internal trade while keeping the Euro for external trade.